Reviewer in IE12

8/8/2019 Reviewer in IE12

1/8

Chapter 14 - Firms in Competitive Markets

1. Define competitive market

A market with many buyers and sellers trading identical products so that each buyer and seller is

a price taker.- There are many buyers and sellers in the market.- The goods offered by the various sellers are largely the same

Therefore the actions of any single buyer or seller in the market have a negligible impact on themarket price.

2. Explain the relationship between MR, AR and PriceMarginal Revenue: change in total revenue from the sale of each additional unit of output

Average Revenue: total revenue divided by the amount of output. Tells us how much revenue afirm receives for the typical unit sold.

For competitive firms, marginal revenue equals the price of the good.

y therefore, AR equals the price in all firms, and MR equals the price in all competitivefirms

3. What is the relationship between Marginal Cost and the firms Supply? Why and explain.

y With the MC, the quantity of output that maximizes profit can be foundy MC crosses average total cost curve at minimumy

this allows MC to intersect marginal revenuey therefore the point of highest profit maximizing output is where MC = MRy this way, the marginal costs are sufficiently covered

4. What is the shut-down decision in the short-run?

When therevenue does not exceed the average variable costs, the firm should shut down.However, if the revenue pays part of the variable costs, the firm should continue operating at a

loss.5. Describe how you measure profits on the graph.

y profit= TR - TCy since MR = price, the ATC curve must be below MR to produce profitsy the area between the MC MR intersection point and the ATC point at that specific

quantity indicate the profit

6. Describe how you measure losses on the graph


2/8

y if ATC is over MR, firm experiences lossesy losses are also calculated by area where MC intersects MR and ATC point where quantity

is produced

7. What is the different between short-run and long-run?

8. Why are you at the break-even in the long-run?- The prices increase and decrease, so they eventually even out, thus operate at break-even

9. When do firms exit the industry and what effect does that have on the firm and the market?

- Firms exit when there is a SR loss- Supply decreases, market price increases & loses will eventually disappear

10. When do firms enter the industry and what effect does that have on the firm and the market?

-Firms enter if P>ATC-Its the exact opposite as conditions for firms to exit

-supply increases, price falls and profits of other firms gradually disappear

Chapter 15 - Monopoly

1. Why do monopolies exist?

Barriers to entry:- A key resource is owned by a single firm

- The government gives a single firm the exclusive right to produce some good or service- The costs of production make a single producer more efficient than a large number of producers

2. What are the different types of monopolies?

Government-created monopolies: government has given one person or firm the exclusive rightto sell some good or service

ex. patent (exclusive right to manufacture and sell) and copyright (noone can print and sell thework without permission) laws

Benefits: increased incentive for creative activity

Natural monopolies: A single firm can supply a good or service to an entire market at a smallercost than could two or more firms. Arises when tehre are economies of scale over the relevant

range of output.

ex. public goods and common resources (bridge, etc)

3. How and why is DeBeers a monopoly?DeBeers is a monopoly because they have control of 80% of the worlds production of diamonds

giving them substantial influence over the market price. Also the product they producer,diamonds, is often viewed as unique and have no substitutes and so they gain even more market

power.


3/8

The diamonds are viewed as unique because DeBeers advertises diamonds with slogans like

diamonds are forever, this causes consumers to think diamonds must be diffrent than otherprecious gems.

4. How is MR different in monopoly than in PC? Why?In a monopoly, the MR does not equal the D like in PC.The MR has a different slope than the D curve and is under the D.

The MR also intersects the x-axis and determines the elasticity.

5. How is the demand curve in monopoly different than in PC? Why?In PC, the D curve is a horizontal line. In a monopoly, the D curve is downward sloping

6. How and where to monopolies maximize profits?

Monopolies should increase output up to the level where the marginal cost curve intersects themarginal revenue curve, in order to maximize its profits

7. Why do we say that monopolies are inefficient?

They work in their profit maximization point or MR = MC, and this point is on the downwardslopping section of their ATC curve in monopolies making them less efficient.

8. Why don't monopolies have supply curves?

Monopolies will always try to produce at an output level that maximizes profits. therefore, theirsupply is determined by where MR intersects MC

This means that the MC curve acts as the firm's supply curve

9. Discuss deadweight loss and monopoly.

10. What are the social cost of monopolies?Because a monopoly's price is higher than the market sets it as, consumer welfare is hurt, while

the producers welfare increases. However, there is no loss in total welfare, just a shift towardsproducer welfare

In a government created monopoly, the firm must often pay additional costs, such as lobbying

fees, to maintain their monopoly. These costs are another type of deadweight loss, neither theconsumer or the producer benefits

11. How are monopolies controlled by the government?

Governments regulate monopolies by taxing and subsidizing them to influence their prices.Sometimes the govt. will act in the consumers best interests, and other times it will act in the

industry's best interests. An effective regulation finds an equilibrium point between the two.

12. What is price discrimination?When prices are different for different people in society, usually due to their social background

and their income. This means that for example water might be cheaper for the poor and moreexpensive for the rich. It's prices do not have to anything with the costs.


4/8

13. How does price discrimination relate to producer and consumer surplus?

Price discrimination may occur more when consumer surplus is lower, since less consumers willhave the ability to pay a certain price. Also, price discrimination may not occur as often if

producer surplus is lower, since they cannot cover their costs by altering prices

Chapter 16 - Oligopoly

Do online quiz at: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html

and send me the results!

1. Describe an oligopoly market.A market structure in which only a few sellers offer similar or identical products

An oligopoly is a type of imperfect competition, meaning firms in these industries havecompetitors but at the same time do not face so much competition that they are price takers.ex. market for tennis balls, world market for crude oil

A key feature of oligopoly is the tension between cooperation and self-interest. The group ofoligopolists is best off cooperating and acting like a monopolist, producing a small quantity of

output and charging a price above marginal cost. HOWEVER because each oligopolist caresabout its own profit as well its hard for a group of firms to maintain the monopoly outcome.

2. What is a cartel and collusiony cartel - a group of firms acting in unison. Once a cartel is formed the market is in effect

served by a monopoly. That outcome maximizes the total profit that the producers can getfrom the market.y collusion - an agreement among firms in a market about quantities to produce or prices to

changey ex. Jack and Jill get together and agree on the quantity of water to produce and the price

to charge for it.

3. How is equilibrium achieved in an oligopoly?y

because of competition among the few firms in an oligopoly, they have to watch eachother in deciding how to price their goods in order to compete with the othersy if one firm charges higher than the others, it will lose profits and vice versay so all firms eventually end up with similar prices in order to collaborate, reaching a price

equilibrium


5/8

4. What is the Nash Equilibrium?o A situation in which economic actors interacting with one another each choose

their best strategy given the strategies that all the other actors have chosen.

5. Describe how the size of an oligopoly can affect market outcomes.

6. Summarize the OPEC and World Oil Market example on pg. 357y world's oil is produced by a few countries, mainly in the Middle East, that form an

oligopolyy formed a cartel, OPEC (Organization of Petroleum Exporting Countries) that controls 3/4

of the world's oily

OPEC tries to set production levels - increase price through coordination to decreasequantity produced (high price is ideal)y some members choose to "cheat" by agreeing to decrease production but instead increase

to get a larger portion of the total profity this causes the oligopoly to become ineffective b/c of lack of cooperation/argumentsy success depends on how well its members cooperate

7. Define Game TheoryGame theory is the study of how people behave in strategic situations, in whichthey must consider others' responses to their own actions

8. How is game theory relevant to oligopoly?Because the number of firms in an oligopoly is very small, each firm must

take into account the reactions other firms will have to their own actions.

9. Summarize the other examples of the prisoners dilemma pg. 361-362.y Arms Races: Each country prefers to have more arms than the other because a larger

Arsenal gives it more influence in the world affairs. But, each country prefers to live in aworld safe from the other country's weapons.

y Advertising: Deciding wether to advertise between two companies: If neither advertises,the two split market. If both advertise, they again split markets, but profits are lower since

they must now pay for advertising. However, if only one advertises, it attracts customersfrom the other brand.


6/8

y Common Resources: This views the dillema into companies having to decide how manynatural resource to obtain and negate the other company. Basically shows the self interest

of both leads them to inferior outcome.

y10.Why do people sometimes cooperate?

Cooperation can make everyone better off. The "prisoner's dilelamma" states that while

cooperation between the two prisoners is difficult to maintain, it is mutually beneficial.

I.e. In the game we played in class, you could work together and make a constant profit insteadof risking a huge loss for the sake of a larger profit

11.How does the government regulate oligopolies and why? Anti-trust lawsy

i.e. Sherman Antitrust Act of 1890 condemned criminal conspriacy amongst oligopolistsy Clayton Act of 1914 encouraged parties to sue oligopolists, and they could win up to 3

times the cost of their sustained damages

y US Justice Department and private parties can file legal suits to enforce anti-trust lawsy laws meant to prevent oligopolists from working together in ways that could harm the

public, and also meant to keep the markets competitive

12.Do question 5 on pg. 373.\y

a. Dominant Strategy:o Mexico Low Tariff --- US High Tariff gain is greatero Mexico High Tariff --- US High tariff gain is greatero this means that the US has a dominant strategy for high tariffo US Low Tariff --- Mexico High Tariff gain is greatero US High Tariff --- Mexico High tariff gain is greatero this means that the Mexico has a dominant strategy for high tariff

y b.Nash Equilibrium: A situation in which "economic actors" interacting with one anothereach choose their best strategy given the strategies that all the other actors have chosen

o because both Mexico and the US' dominant strategies are high, there is a NashEquilibrium for high

Chapter 17 - Monopolistic Competition

Please complete and send me the online quiz as well.

1. Describe the monopolistic competition market.


7/8

A market structure in which many firms sell products that are similar but not identical

2. What is the LR equilibrium for MC? Why?y LR equilibrium is when price equals ATC and the firm earns 0 profitsy

this is because when firms are making profits, new firms enter the market, shifting thedemand curve to the left, and when the firms are making losses, their demand curveseventually move to the right

y the free entry and exit drive the profit to zero3. Compare and contrast PC and MC.Under monopolistic competition firms produce on the

downward sloping portion of their ATC curves. Free entry in competitive markets drives firms toproduce at the minimum of ATC. In the long run perfectly competitive firms produce at the

efficient scale (quantity that minimizes ATC), while monopolistically competitive firms producebelow this level. Monopolistically competitive firms could increase the quantity it produces and

lower the ATC of production. For a competitive firm price equals marginal cost. For a

monopolistically competitive firm price exceeds marginal cost because the firm always has somemarket power. For a perfectly competitive firm price exactly equals marginal cost so the profitfrom an extra unit sold is zero. However a monopolistically competitive firm is always eager to

get another customer because an extra unit sold at the posted price means more profit.

4. How does MC affect societys welfare?y just as monopoly, monopolistic competition creates a dead weight lossy too much or too little firm entryy externalities of market entry

- product variety externality = consumers have consumer surplus when new product entersmarket, so new firm entry is a positive externality for consumers -business stealing externality=other firms lose profits when new competitors enter markets, so entry is a negative externality for

firms

y does not always ensure that total surplus is maximized

5. Describe the different scenarios MC can exist in the SR.y

Monopolistic competitors, like monopolist, maximize their profit by producing thequantity at which marginal revenue equals marginal cost. the profit is made when theprice and quantity made exceeds the average total cost.

6. Describe the elasticity of demand in MC.


8/8

The elasticity is the same as for Monopolies. Where the MR curve crosses the x-axis determinesthe unit elasticity (draw a vertical line from the MR & x-axis intersection, this equals the unit

elastic point) - to the left of this point is elastic - to the right of this point is inelastic

Documents

Reviewer in IE12